Sherri Is a Tax Accountant

question 47

Essay

Sherri is a tax accountant. She prepared a large corporate tax return 2 years ago and billed $5,000 to her client. After 2 years of attempting to collect the money, it is clear that she will not be able to collect anything since the business has gone bankrupt. She reports income on her tax return on the accrual basis as she bills it, so the $5,000 was included in her taxable income 2 years ago. Can she claim a bad debt deduction for the $5,000? Explain.

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Definitions:

Deductions

Amounts that are subtracted from gross income or revenue, leading to a lower taxable income or tax liability.

Take-home Pay

The net amount of income that an employee receives after deductions like taxes, social security, and retirement contributions are subtracted from their gross salary.

Times Interest Earned

A financial ratio that measures a company's ability to meet its interest obligations, calculated by dividing earnings before interest and taxes by interest expenses.

Interest Expense

The cost incurred by an entity for borrowed funds, typically expressed as an annual interest rate on debts such as loans and bonds.